Our financial planning system was always going to fall over eventually.

Everyone’s acting all surprised that the Banking Royal Commission has unearthed a graveyard of dodginess and financial abuse.

Probably not my readers since I’ve been banging on about it for years now. And the reason that I’m not surprised in the slightest is that the concept of financial planning, as it plays out in Australia is fatally flawed.

It’s a mess of misaligned interests that was always doomed to fail.

Let me explain.

The key confusion is around whether financial planners sell a product or a service.

Imagine you engage an interior designer. They offer you a service and that service is a interior design for your home. You expect them to be working with your home’s needs first. Maybe they then help you go out and get the individual elements, maybe not. But they’ve given you a service – a design.

Now imagine you walk into Ikea. They offer you a bunch of products. They will try and tune into what your needs are, find the right product for your circumstances, but at the end of the day, they’re trying to sell you something off the showroom floor. They’re not going to recommend you go down the road to the bespoke vintage homeware store, no matter how much your open plan entertaining area is calling out for it.

But that’s ok, because you know that. You’re going to them to have a look at the products they have on offer.

Now what does a financial planner do?

Well, if you look at their marketing, they’re a service. They’re there to design a bespoke financial strategy just for you.

But if you look at how they get paid, particularly by the banks, they get paid as if they’re a product showroom. They get commission based on how many units of certain financial products they sell.

When you look at the remuneration structure, the planners interests align with the banks’, not yours.

But of course, there’s some mechanism that brings those interests into alignment right.

Well, actually no. Not really. There’s codes of conduct and blah blah, but at the end of the day, the only protection you’ve got is your planners’ own ethical sensibilities.

And you know, most of the time, let’s be honest, that’s enough. Most people do the right thing.

But the law isn’t there to protect us from most people. It’s there to protect us from the worst of us.

And as the Banking Royal Commission has shown us, right now, the law is failing miserably.

So in my mind, the only way you can bring financial planning into alignment is to stop financial planners from also selling products.

Make them do what their marketing says they’ll do – design a strategy based on your unique circumstances.

Then we can have financial product showrooms – what the banks used to do. Somewhere you can go to get the right financial products for your needs, once you’ve nutted out what your strategy is.

But there needs to be a firewall between them.

Sure, financial planners can recommend particular products off that showroom floor, but as soon as they’re being paid based on how many units they sell, then there’s a misalignment of interests.

And at some point, somewhere, that’s going to break down.

And this is why financially planning, as it currently exists, is fatally flawed. It’s set up to fail.

But don’t expect to see change come from the financial planners or the banks. The system is set up to serve them. The fight needs to come from the customers.

At the end of the day, the aim of the game is to buy your own life back

How much do you need to replace your income? Let’s crunch the numbers on it.

Ok, so say the average household income is $80K a year. That’s a decent mark to aim for. You can get by on that.

Let’s also assume that you’ve got a portfolio of properties yielding 5% a year. That’s also modest. You do hear of people settling for 2% in Sydney and Melbourne these days, but across the country, I think 5% is realistic.

So let’s back it out. How much do need at that kind of return. Well, to replace $80K you need 20 times that much: $1.6 million.

Could you ever save that much?

No way. Even if you saved 50% of your pre-tax income (a massive amount) it would still take an average household 40 years to save that much money!

But thankfully we don’t live in a universe where we have to live off savings alone. We can invest, leverage our money, and use our wealth to grow more wealth.

But even still, building a $1.6m portfolio takes time and patience. For some people it’s a life’s work. Sadly, some people are only ready to retire when they are almost ready to retire.

Such a tragedy.

But let’s think about that 5% number for a second there. Some people might look at that and think it’s ambitious in the current interest rate environment.

I look at that and think it’s piss-weak.

I can tell you that my portfolio is easily returning double-digits. Not every deal and not every property gets north of the 10% line, but some of them are well north of that mark, and on average, I’m into double digits easy.

Now, partly that is about being at a stage in my wealth journey where I’m able to access a different class of deal. I get invited to the high-roller table on a regular basis. And because I’m tipping in more capital, the returns tend to be higher.

Wealth creates more wealth.

But it’s also about being smart with the deals I do go in for. And I would say to anyone starting out in property investment, no matter where you’re coming from, that 7-10% isn’t an unrealistic target to aim for. With the right skills and the right knowledge, any one can hit that mark.

So let’s look at our numbers again.

Let’s assume that instead of getting 5%, we’re now getting 10%… does that change the game much?

You bet it does!

Now instead of needing $1.6m, we need half that much, just $800,000.

Or think about our world where savings are the only way to grow wealth. We’ve just saved ourselves 20 years!

Even in the real world, that has just saved us a tonne of time. Like what? Maybe a decade.

Who wouldn’t like a decade of free time?

The central point is, what’s going to be easier? Saving and amassing another $800,000, or investing in your skills and education, and getting better returns on the deals that you’re doing?

(yes that’s a rhetorical question)

And I’m not talking huge bucks. $10,000 would well and truly cover it.

Would you pay $10K for a decade of free time?

Seriously. A decade off. A decade without work, without deadlines, without the boss telling you what to do.

A decade to put energy into the things that matter. Your relationships, your passions, your I’ve-never-done-spear-fishing,-might-give-that-a-go’s.

A decade that is entirely yours.

Seriously think about it. Imagine, in my hand I have the ticket to the next ten years of your life. I can make them completely yours. The price tag? Just $10K.

If investors are evil, explain this…

I know I’m pissing in the wind, but here’s what really happening in Australian property.

One of the interesting themes that does the rounds is that the reason that house prices have risen so much and therefore the reason why our poor children are sleeping in cardboard boxes under the railway tracks, is because of investors.

Greedy investors have destroyed the market, destroyed affordability and destroyed the Australian dream.

A lot of this goes unchallenged. I find that interesting. I think what it shows is that we still have a bit of cultural cringe around making money.

I think a lot of investors do feel a little bit guilty that they’ve made good money in recent years. That somehow, they must have done something at least a little bit naughty.

Nevermind that the CEO of any major Australian bank takes home a small African nation’s GDP worth of stock options each year, or that Paris Hilton gets paid millions of dollars to rock up to a party and do balloon animals.

No, I made 10% on a property I spent months researching. What a bad boy am I.

It is just one of those things, and as funny as it is, I’m still happy that we don’t live somewhere as money and status conscious and shameless as the US.

So it is what it is.

The thing that I find interesting about this stylised fact, is that there isn’t a whole lot of data to support it.

It is true that we saw the investor share of mortgage finance increase in recent years, especially in NSW and Victoria.

But when APRA started putting a brake on investor lending, we found out that the processes that gathered info on whether the loan was OO or investor were pretty loose.

It didn’t really matter, so the banks didn’t stress all that much about recording whether someone was an investor or a first home owner.

And there were some creative work-arounds that allowed first time buyers to stretch a little further if they said they were buying it as an investment property – by saying they expected $x rental income, and using the default bank assumptions about their own rental expenses, and squeezing out a couple of extra hundred dollars in servicing.

And so some chunk of investor borrowing might actually have been owner-occupier.

Of course, now it’s flipped the other way. Investor mortgages are attracting a premium, and so some investors are actually finding it better to declare as owner-occupier if they can.

So who knows what the truth of it is.

The best guess is probably the ABS survey of Household wealth. Corelogic did some interesting analysis on it the other day.

What they found is that yes, there has been an increasing in the number of households that are rental properties.

It’s up from around 26% of households in 1994, to about 30% in 2016.

That’s not a HUGE increase in 22 years, and note that it’s fallen in the most recent observation. So the narrative of investors ransacking our children’s future doesn’t really bear out here.

But what’s interesting is when they look at owner occupiers.

The percent of households that own outright has been on a steady downward trend – from 44% in 1996 to just over 30% in 2016.

That’s a much bigger fall than the rise we’ve seen in rental properties.

At the same time, the share of households with a mortgage has risen steadily, up from 27% in 1996 to 37% in 2016.

Again, making the rise in rentals seem small.

So the real story here is the fall in the number of properties in Australia owned outright.

Is that about evil investors buying all the properties? Hardly. It’s about more households having a mortgage, and presumably, for longer.

What’s driving that? Price rises. As prices rise, it takes longer to pay off a mortgage (since prices have risen much faster than wages).

Now let’s look at the arguments against. I’m going to divide this into two sections. First I’ll look at the block-chain in general, and then I’ll have a look at crypto currencies and Bitcoin in particular.

The Block-Chain
Disruptive technologies are all the rage these days. Like the way Uber disrupted the taxi market, or the way AirBnB disrupted hotels. It’s very buzzy.

And people point to block-chain as the next big disruptive technology. The most recent example of anything like it was the birth of the internet, they tell us.

And I am loving what block-chain has to offer, but when I look into it, it looks less like a disruptive technology and more like a “foundational technology”.

So email disrupted regular mail. The internet was the foundation for email.

But even that’s not entirely right. The block chain is more like TCP/IP (transmission control protocol/internet protocol), which created the shared language that made the internet possible.

Before that, computers had to connect to each other directly (or network to network). TCP/IP enabled all participants to join together in the world wide web, without the need for a central exchange.

It was ‘distributed’, and that’s why it’s a better metaphor for block-chain I think.

But TCP/IP launched in 1972. It would then be over 20 years before the first commercially viable internet-based companies launched.

So how long do we have to wait before the commercial promise of the block-chain is realised?

What’s more, you couldn’t monetise TCP/IP itself. You couldn’t make money of it. It was a common good. It was owned by everyone, it benefited everyone. That was precisely the point.

Same story with the block-chain. It’s set to make a whole bunch of amazing things commercially viable. But it doesn’t mean that the block-chain itself, or the first generation of block-chain thingys, are going to make money.

The other thing I’d say about the block-chain is that while it contains seeds for a social revolution, that revolution will take many, many years to materialise.

So say, you have smart-contracts based in the block-chain. That contract says that I owe you $5. There indisputable proof that it’s true. We know the block hasn’t been tampered with. It clearly says that I owe you the money.

But I refuse to pay.

So what do you do?

Contracts are useless unless they can be enforced. For that, you need some wholesaler of violence – historically the government.

But then you might say, but it’s a trust system. If you diddle someone, it’s recorded. You get something like an e-bay profile score. That disincentives cheating.

But hang on. I thought anonymity was one of the great selling points for the block-chain? And what’s to stop me from setting up a string of fraudulent identities?

A huge amount of social infrastructure goes into simply proving to others that we are who we say we are, so we can enter into contracts with each other.

If you take governments out of the equation, you take all this social infrastructure with them.

Ultimately, we may find better way to do all this, and block-chain may be a start, but it’s far from the final word.

Bitcoin
The first point with crypto-currencies is that money is power. If you think that governments are just going to sit back and hand all that power over to the people, I think you’re a dreamer.

But, you might say, “It’s too late. The block belongs to everyone. They can’t control it now.”

I think it is probably true that they can’t kill it, but I don’t imagine they’d want to. They’d either side-line it or co-opt it. Currently, neither option strikes me as particularly hard.

(China recently shut down all its crypto-exchanges and went and seized all their records. So much for anonymity.)

Of course there are ways round this. But if your solution involves every person in the global economy running their own virtual private network and putting time and energy into staying a step or two ahead of the crypto-police, again I think you’re dreaming.

The other big draw-back for cryptos is that transactions are not free. People talk like they are because, there’s no central fee processor (like PayPal), but there’s still a cost that needs to be borne.

Currently the processing that drives the Bitcoin network is driven by miners. They receive rewards in the way of coins, and fees from individuals who want to see their transactions moved to the front of the cue.

And currently, that whole system is being driven by five to ten companies, according to Business Insider.

That’s not sounding that awesome.

It’s not immediately evident to me that a global financial network organised by a couple of hundred nations is inferior to a financial network powered by five to ten companies.

Especially if those five to ten companies have an ability to control fees…

But the point is, unless transactions are free, there is a cost that must be borne. There is a price that must be paid, and a fee that must be collected.

Money is concentrating somewhere, and with it, power.

This might sort itself out in time, but the current generations of cryptos all seem burdened with this flaw to me.

The final point is about Bitcoin in particular.

Have a read of this statement from Amazon’s 1997 letter to shareholders:

“We established long-term relationships with many important strategic partners, including America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy.”

Of course they did. These were THE players in the internet space in 1997. Netscape was the first personal web browser. These companies dominated the internet just as it began to launch.

And how many still exist?

Maybe Yahoo, kind of, but apart from that, they’re all dead.

Now if block-chain is the next internet, as people like to claim, is Bitcoin the next Netscape?

Even ten years is a long time in business these days. If you’re betting on Bitcoin, you’re betting that no other player comes along and cuts bitcoins turf in the next.. what? 30 years?

That’s quite a gamble.

The way I see it, Bitcoin is very vulnerable to disruption. Its cost structures seem high, so there’s always the potential for undercutting.

Or, let’s say Amazon – the largest retailer in the world – launches its own coin – the Amazonian. At the time it says that you can only buy things with Amazonians but it will accept any Amazonians from anywhere.

(Remember when governments launched money in the past, they decreed that all taxes had to be paid in that money, to enforce widespread use. This would be Amazon’s equivalent play.)

People would find that they’d be happy to accept Amazonians, because there is a guaranteed use for them. If, at the same time, governments tried to block Bitcoin, but gave the green-light to Amazonians because Amazon committed to submit to the tax structures of the day (dodging tax seems to be one of Bitcoins supposed selling points) then the bulk of coin users will gravitate to Amazonians. It would just be easier.
In this game, user-numbers are king.

Bitcoin has the numbers for now, but there’s a long road of uptake ahead of it before it can claim to be the dominant player for sure.

And even then, how long do dominant players in any industry last these days? 10-20 years?

So to me, betting on Bitcoin is really a bet that no better system will evolve in the next 10-20 years. And I’m not talking about better from the perspective of an anarchist utopia, but better simply from the point of convincing more mum and dad users to get on board.

That is a HUGE bet in my mind.

So if you’re investing in Bitcoin – and really we should stop saying “invest”. If Bitcoin is actually currency, you don’t ‘invest’ in currencies. You speculate in them. You buy them on the speculation that they will increase in relative price. There’s no underlying value.

So if you’re speculating in Bitcoin, I would say that you need to be aware that the massive returns that are possible are equally balanced with the massive risks involved in any single crypto-currency.

Block-chain is a revolution. It’s amazing. But so was and is the internet. And a lot of money got poured down the toilet during the dot-com boom.

To me it feels like a case of history repeating.

???

What do you think? That’s my case against Bitcoin. Stronger than my case for?

I’ll leave it to you to be the judge. I’m just trying to shed a light on a world that has become very confusing very quickly.

And of course. I’m no expert. I’m just a smart guy with a few hours up his sleave. There could be huge parts of the story I’m missing.

Very happy to hear about it.

NEXT TUESDAY: I’ll look at wether Bitcoin is a bubble (what you need to be in a bubble) and look at ways you could still make money, even if it is. Look out for that.

Ultimately the American experiment is a case study in how governments can make or break a market.

Sometimes government regulation is a good thing. I personally prefer to live in a world where there isn’t an open market for personal nuclear weapons. I support government regulation in that industry.

However, and I know this will come as a surprise to many of my readers, the government isn’t always perfect.

It doesn’t always make great decisions. Often, it actually makes very bad decisions in order to protect the interests of the rich and powerful.

(I know! It was a shock to me too. I’m sorry. I really should have made sure you were sitting down first.)

So is all hell going to break loose if we legalise marijuana? It seems unlikely. Marijuana has been down the priority list for the police for a while. It has never been particularly expensive or difficult to get.

And we’ve got by.

And some argue that there’s a signalling effect here. That if we legalise marijuana we’re telling kids that it’s ok to get off your face.

That’s kind of the message we started sending when we legalised alcohol again if you’re using that logic. And if you’re taking moral guidance from the government you probably need to have a good long chat with your priest.

So personally, I see this having a very small impact on the fabric of society.

So if you’re ok with the moral dimensions, and I more or less am, then the question is, where is the money?

This is a tricky one. We’re really looking for the government to make a market here. There are a number of Australian companies getting ready to launch when Australia finally starts down the path towards legalisation.

But the government is sending mixed messages here. Some days it looks like their stance is softening. Other days, it looks like it could be years down the track.

As I’m sure you know, it’s cash-flow that kills most start-ups. For marijuana stocks in Australia that could mean a whole lot of stranded companies with state of the art infrastructure and nowhere to deploy it.
And the longer the Australian government drags it out, the more opportunity there is for foreign companies to fully gear up and get ready to expand.

I mean, let’s say Australia doesn’t open the door until well after 2020. By that stage, the American marijuana industry will be starting to consolidate. Large players will start to emerge. They’ll have developed all the tools they need – technology, business models, finance partners.

They’ll come into the market full guns blazing, just as our little Aussie battlers are trying to get off the ground.

They’ll probably get slaughtered.

And right now, it seems that the government is going the wrong way for people interested in backing Aussie companies. I know a hemp farmer up in Northern NSW. They’d been gearing up production of low-THC (the stuff that gets you high), high-CBD (the stuff that has medicinal properties) crops.

The government had been moving towards making CBDs legal.

But then the Therapeutic Goods Association surprised everyone and said, actually, no, CBDs will remain illegal. You have until October to wrap things up.

It looks like they’re stuffed.

So this is the danger here. If you’re investing strategy relies on the stroke of some bureaucrat’s pen, your strategy is built on an institution that has been corrupted time and time again.

So there’s a substantial amount of risk there.

And that’s one of the reasons why the returns are so high. Can you predict what the government’s going to do in two or three years? Sometimes it’s a coin toss.

So look, yes, there are potentially some huge returns to be made out of the marijuana industry. I’m looking at some options myself.

But be aware of the risks. The government was happy to hang a whole bunch of hemp growers out to dry. They’re not going to give a toss about your investments.

That’s not to say it’s not worth it. But marijuana stocks belong in the risky tail of your portfolio, I reckon.

Have you made money from the marijuana hype? Are you sold on it, or are you staying well clear?Do you think it’s a bubble about to burst, similar to techwreck2000?

“A good investor learns from their mistakes. A great investor learns from their successes.”

I think this is a really good one to remember.

In a way, it’s much easier to learn from our mistakes. When things go wrong, we’re much more interested in deconstructing what actually happened and what went wrong.

We’re primed to learn. We’re eager to avoid the embarrassment and setbacks that come with failure.

But when things go well… When a deal goes perfectly and we end up with a lot more cream than we were anticipating, we get on a high.

We’re full of juice and go. We just want to launch into another deal as soon as we can.

And the human biology is programmed to unquestioningly repeat successes. If eating those berries turned out well for us in the past, well then lets do it again.

But the modern world is more complex than our evolution ever imagined.

And there’s a real danger here if you’re not critically evaluating your successes.

I mean say you buy a site for development. You get a few months into planning and the numbers aren’t really adding up. But then the land gets rezoned, and you flip the site on to developers for a very tidy profit.

Win, right?

You made money because you made a smart buy.

But actually no. You made a mistake. You didn’t buy well. If you bought well, then the development numbers would have added up.

You made a mistake. But you got bailed out of your mistake by the re-zoning.

So this should be a big red stop sign saying, I need to take a look at my method here, because I’m buying lemons.

But that’s going to be hard to do if you just double or tripled your money. You’re going to be thinking. Let me at ‘em. I want to buy again.

In this situation, even with the best intentions and critical self-awareness, it is actually hard to hold your horses and take the time to analyse just how the deal went down.

And that’s when it’s actually fairly easy to unpack.

What about when you’re buying and developing in a market that’s got a run on?

How much of your profit margin is due to buying well and putting in a quality development? How much is just due to the market? How do you even know?

And right now, across Australia, there are 1,000s of property experts. People who’ve made lots of money and have sure-fire strategies for success.

At least they think they do. But the truth is most just got lucky. They bought at the right time and made their money off the market.

They just don’t realise it. In their minds, they’re geniuses. The results speak for themselves. If I wasn’t a genius I wouldn’t be making all this money, would I?

This is also one of the reasons why we see this bubble and bust dynamic play out in markets the world over.

On the way up, every one thinks they have the secret formula. They have some insight and strategy that 99% of people don’t have, and they’re turning that into coin.

They all do.

But at some point, the fundamentals bite, and the emperor realises that they’re naked. People realise that they’ve been buying junk, and there’s no way off a sinking ship.

Does this sound familiar? Dot-com bubble anyone?

Crypto-currency?

Now, I know I’ve been sitting on the fence a little bit over crypto’s, but now I’m calling bubble.

Why?

For exactly this reason. I’ve got all sorts of people in my ear about buying into crypto-currencies, and most have no idea what they’re talking about.

And we are well and truly into LaLa land.

Take “Fuck Token” (seriously, I’m not making that up.) That was up 370% in 24 hours last week.

I don’t even know where to start with that one. But it’s actually chump change compared to some of the numbers getting round…

There are now thousands of companies issuing coins. Rather than selling shares, they’re selling investors digital tokens (to people who mostly pay in Bitcoin or Ether).

So rather than IPOs we now have ICOs – Initial coin offering. It’s pretty much the same, just more ‘crypto’.

And some of the stories there are ridiculous.

There’s a token issued by Stratis that is up 101,168%. And that’s in a single year!

The NXT token is up 672,989%

They’re not typos. They’re actually results. In case your head isn’t spinning already, if you put $1 into a NXT token a year ago, you could now cash out $672,989.00.

(oh for a time machine.)

But what’s going on in the underlying business?

Maybe they’re doing great things, but is there any conceivable way that the business is 672,989% better than it was a year ago?

Short of discovering cold fusion, perpetual motion (or a time machine), there’s no conceivable way we can justify these results.
We’re in LaLa land.

And look, I know crypto has substance. There are multiple uses that have profound implications.

But then so did the internet in 1999. That didn’t mean that Pets.com was the billion dollar unicorn people thought it was.

Having a kernel of substance doesn’t protect you from hype and irrational exuberance.

But I am now being told to ‘get into cryptos’ by people who really don’t know what they’re doing.

I ask them what a crypto currency is and they say it’s like digital money. And I say, yeah, I’m aware of digital money. I do my banking in the 21st century.

“But it’s so easy, Jon.”

“Yeah, it’s easy until it isn’t.”

And look, that’s not to say there isn’t still money to be made. You might make another 670,000% before the whole thing topples over.

But if you’re going to do that, just be aware that you’re gambling now. The herd is on the stampede, and all the supposed ‘fundamentals’ in the world won’t save you when the herd turns.

There’s value in cryptos for sure, but now, more than ever, you need to know what you’re doing.

The dream of a golden crypto-currency future copped a serious blow this week.

Around 2004 I was presented with an opportunity.

It was a special ‘insider’ offering into a plucky American start up. They had a radical idea – to create a site where people could upload and share videos with each other, over the internet.

I turned it down.

I don’t really remember why. It all seemed a bit risky. The technology was new. They didn’t have a clear direction for how they were going to monetise the service. So I knocked it back.

Was it a mistake?

Hardly. The company went belly up after about 18 months. I would have lost everything.

This company wasn’t YouTube. It was one of about a hundred companies aspiring to be YouTube at the time.

YouTube just won the race. I don’t even think they were the first to get their product to market. But with three of PayPal’s exec’s at the helm, they were able to scale rapidly, until they became the dominant player in an ecosystem that was only ever going to support one player.

It’s one thing to have a million dollar idea. It’s another to have a million dollar business.

And so when I was presented with that investment opportunity back in 2004 or whatever it was, I had no way of knowing if they had a good business. They had a good idea, sure, but beyond that, I just didn’t have enough info to tell.

And I don’t like to take risks with my money. So I knocked it back.

It’s the same story with all the crypto-currency stuff.

Someone asked me my opinion about it the other day. Sure, I get the power of block-chain. I get the revolution it has the potential capacity to deliver. It could be a whole new ball game.

But what is it going to be? Which “coins” are going to dominate the market? We hear a lot about Bitcoin and Ethereum, but there are hundreds of crypto-currencies out there.

Like, did you know there’s a thing called ‘Potato Coin’? This one aims to become a unit of currency for poor African farmers (a noble aim).

Or what about ‘Wankcoin’? (Seriously, I’m not making this up.) This is designed to help porn-enthusiasts support their industry.

Someone has even launched ‘Ponzicoin’ – and people are actually buying it.

The whole alt-currency world is very weird. And as far as I can tell there isn’t a way to buy an exposure to block-chain currencies at a concept – you have to invest in individual coins.

It’s like in back in 2004 – if I could have invested in the concept of video-sharing over the internet, it would have been a no brainer. The need was obvious, and technology was certainly heading that way.

And you would have made a motza.

But you can’t invest in concepts. You can only invest in companies.

And that introduces a whole lot of complexity and uncertainty.

And they’re concepts I just don’t like to see attached to my investments. I’m a simple guy at heart.

Anyway, there was some other news this week that has made me rethink the whole crypto currency proposition.

What news?

Yep, one of the largest investment banks in the world, and depending on what conspiracy theory blog you subscribe to, is responsible for AIDS and faking the moon-landing. They’ve just brought out their own currency.

They’re calling it SETLcoin, and it aims to help parties settle share transactions. There’s a niche here. Currently it can take up to three days to settle a share trade. SETLcoin will make it instantaneous.

I was excited about crypto-currencies when I thought they were being built by 14-year old Japanese boys in their bedroom on retro-fitted Sega-64. But if we’re talking about one of the wealthies banks in the world?!?

That’s an entirely different story.

But I guess when you step back and look at it, it was always going to go this way wasn’t it? Money is power, and the powerful aren’t just about to let money get ‘democratised’ out of their control are they?

To be honest, I’m feeling a little deflated today.

I feel like it’s similar the revolution going on in the media. Traditional newspapers are dying. Their readership is too broad, their business models obsolete.

But rather than getting agenda and vested-interest free micro media – media created by the people for the people – we’re getting fake news. We’re just getting BS.
Apparently a bunch of those fake news sites in the last US election were just built by bored kids in Serbia, just looking to make a buck.

And crypto-currency, rather than democratising money, could just be about to concentrate it in hands even less accountable than our governments (low bar I know).

That’s not going to be an improvement.

And as strange as it is to say, I think I prefer a government controlled money to money controlled by Goldman-Sachs, or whatever global financial powerhouse it ends up being.

Suddenly, I’m pro-government?!?

Oh dear, oh dear.

Turns out that revolution I was waiting for… well, looks like it’s going to be a little further off than I thought.

I’m sure I’m not telling you anything new when I say that there’s a diversity of outcomes in the Australian property market right now.

This chart here sums it up. It looks at growth in Australia’s capitals since 2011.

As you can see, Sydney is thumping ahead. Melbourne is going great guns too.

Brisbane and Adelaide are growing, steady as she goes.

And in Perth, prices peaked around the end of 2014, and have been drifting lower since.

Now you’re going to hear a lot of theories about why the capitals are on different tracks. It could be the vibrancy of each state economy. It could be planning regimes. It could be the resources boom and bust.

But at the end of the day, it really comes down to one thing:

Population.

There was an interesting report out from the Macrobusiness guys comparing population flows with dwelling approvals in all the capital cities.

What they found was that the connection between property prices and population stuck out like a sore thumb.

Take a look at the national chart to start with. Population growth is the green line, while dwelling approvals, commencements and completions are the others. For now, let’s just look at how the green line tracks against the others – how population is moving against new supply.

At the national level, you can see that population growth peaked just after the GFC. It has come off a little since then, but still remains around historical highs.

That’s a strong plus for property prices.

At the same time though, construction activity is picking up, and is also way into ‘records high’ territory.

So that might take some of the heat out of prices going forward.

But as we keep saying, the national picture is only so useful, and you need to dig a little deeper to figure out what’s happening on the ground.

So we can rerun this chart for each of the different states. This is what the results look like:

New South Wales

You can see here the massive surge in population growth, which coincided with a collapse in construction, although that has picked up again recently.

For all the surge in construction activity in Sydney, it still looks like it’s going to take a long time to unwind the housing shortage there, and prices look unlikely to settle soon.

Victoria

Victoria has been the construction leader, mainly through high-rises. However, population growth continues to be strong, suggesting that market remains balanced.

Queensland
In Queensland, the chart is a little more troubling. Queensland has been adding a lot of supply recently, but population growth has been slowing considerably.

This, I think, is why you hear people fretting about an apartment oversupply in Brisbane. Supply has been strong, but it’s not clear that there is the population growth to meet it.Western Australia
Over in Perth, the story is even worse. There the construction boom is unwinding quickly, however a lot of the supply is already on the market. That’s happening at the same time that population growth falls to some of the lowest levels this century.

This helps explain why prices are falling in Perth, and while there’s another year or so of hurt already in the main line.

South Australia
In South Australia, population growth is also coming off, but we never saw the construction boom there that we saw in other states.

Population and construction are moving together, suggesting sustained and stable price growth is the most likely scenario.

The Northern Territory
Like Perth, we’ve seen a marked slowing of population growth in recent years. Construction has also come off, but it remains relatively elevated.

This suggests that until we see population growth return or construction start to ease, dwelling oversupply should continue to keep a lid on prices in the NT.

The ACT
And just for completeness’ sake, here’s the ACT.

Not all that much to say here. Population growth and construction remain elevated, but nothing crazy. They seem to be moving broadly in line, suggesting that property prices should be growing in line with incomes.

Population Matters
We might hear talk of the different factors driving each state market, but really, when it comes to property, it comes down to supply and demand. Demand is mostly about people numbers, and if you look at where population growth is strongest, it’s no surprise that that is also where price growth has been the most vigorous.

And when we’re talking about different state economies, we’re kind of using the economy as a proxy for population growth.

When the economy is doing well, a state starts pilfering population from other states, and the property market tightens in response.

(My Kitchen Rules is also missing, but that’s a topic for another time…)

Since about 2003 when Renovation Rescue came on to the scene (though you can probably trace the trend back to Backyard Blitz which launched in 2000), renovation-based television shows have been consistent performers on Australian television.

In many years they were the best performing shows of the year (not counting AFL finals etc.)

What does this say about us?

Well, as the well-worn saying goes, Australians love their properties. I’ve always been a bit sceptical about this saying. Who doesn’t love houses? But it does seem that Australians do have a unique relationship to property.

And perhaps more than anywhere in the world, Australians are tuned into the fact that their house is not just a home, but the most important and powerful asset they own.

The Australian public led the media on this one. Reno TV started out with the idea of “how do we make this property awesome?” But it quickly merged into, “How do we make this place awesome, AND increase its value.”

And this idea gave us The Block, where the capital gain is literally the way winner is decided.

All of this is absent in America.

Well, not totally. But property is certainly not the BBQ stopper it is here. And I’d venture to say that the Australian population is the most property savvy in the world.

This gives us an advantage.

And while there are no renovation shows in the top 20 in America, they do exist. But they have a slightly different flavour there.

For example, Income Property finds households with cashflow problems and shows them how they can build a granny flat or something to generate a little extra income.

Flip or Flop follows a husband and wife team of ‘flippers’ who find distressed properties, buy them at a discount, and renovate for a profit.

“Flipping” has never taken off in Australia, and I think that speaks well of us. I always see flipping as an immature strategy. It’s like you get in there and renovate, the price goes up and you get all excited and sell.

If you’ve got a solid property, why not keep the rental income and use the equity to keep building your portfolio?

That’s the Australian way.

But this is the nature of American reno TV. It’s about flipping houses for profit, or escaping financial hardship.

It is not about ordinary people finding creative ways to improve the capital values of their homes.

And so to me, it just seems that Australia is further down the road with our relationship to property. We know that any growth we manufacture is not just about the “profit”. The real power is in the extra leverage it opens up.

And its this difference the creates the opportunities for Australian investors in America.

When I’m looking at properties in the US, I often feel I’m the only investor in the game. Maybe there’s a couple of owner-occupiers. Maybe – MAYBE – there’s a flipper, but they need different numbers to me anyway.
And so I’m finding I’m picking up deals where I’m thinking, there’s no way a property with these kinds of numbers would last more than a day on the market in Australia.

But sometimes I’m the only one making an offer.

Add to that some super-cheap buy in points, strong rental returns, and markets that are still emerging from the swamp of the GFC – still entering their upswing phase of the cycle – and you have some excellent opportunities.

My feeling is one day America will catch on. Average Americans will realise the wealth-creation power of property, and American TV will be swamped with The Block rip offs.

Til then, I’m going to enjoy the benefits of being ahead of the curve.

What do you think? Are Australians the most savvy property investors in the world?